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Smithfield Aims To Stick With Sale After Shareholder Says Breakup Is Better

Update 4:30 p.m.: Smithfield issued a statement Monday afternoon confirming receipt of Starboard’s letter, but said its board still “unanimously believes that the transaction with Shuanghui is in the best interests of the company, its shareholders and all Smithfield stakeholders.” The company reaffirmed its recommendation that investors sign off on the deal with Shuanghui, but said it will review the breakup suggestion.

Shares of Smithfield closed at $33.08 Monday, up 0.9% on the session and still slightly below the takeover bid.

In late May, Smithfield FoodsSmithfield Foods agreed to a $4.7 billion buyout at the hands of Chinese investment firm Shuanghui International Holdings. Now, a major shareholder of the pork producer says the company might be worth even more if it is broken up and sold in pieces.

Starboard Value sent a letter to the company’s board arguing that selling the business in segments to a number of buyers could result in a sum-of-the-parts valuation of $44 to $55 per share. Shuanghui offered $34 in a deal that precludes the company from seeking superior offers.

That’s where Starboard comes in. The hedge fund, which owns about 5.7% of the company’s stock, says it is “seeking to identify and connect any strategic or financial buyers for the Company’s individual business units.”

Starboard’s letter Monday addresses the potential for improvement at each of the company’s segments — Hog Production, International and Pork — and says that while the current takeover offer “goes a long way toward closing the gap” between Smithfield’s market value and its intrinsic value, it still “significantly understates a conservative sum-of-the-parts valuation.”

The firm says the pork unit, which generates the most revenue and EBITDA, is the most valuable asset, growing revenue 7% annually over the last five years. Yet the unit’s Fresh Pork business has “consistently underperformed” the comparable business of Tyson FoodsTyson Foods in terms of efficiency. Starboard argues that underperformance can be rectified within 18 months by consolidating processing, reallocating packing to the most efficient plants, upping shifts at the those plants and pursuing co-packing contracts with other pork producers to cut fixed operating costs.

Shares of Smithfield were up 1.3% to $33.23 Monday morning, a modest discount to the Shuanghui offer, which carries an enterprise value of $7.4 billion. Starboard thinks the company is worth $9-10 billion in pieces. Another shareholder, ContinentalContinental Grain, had also been agitating for change but sold the bulk of its holdings in early June after the stock price ran up toward the takeover bid.

On Friday Smithfield recorded a 63% drop in fourth-quarter profit due to higher feed costs and an inability to push higher prices out to customers.

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Speaking of unacceptable greed! It’s ridiculous that someone would speak of destroying a wealth-creating entity such as this so they can make more short-term profits, but that’s what the rich have come to in this country. Anything whatsoever is OK, so long as I make more money!

I haven’t checked, but a break up and sale might not bring with it a nice change of control severance package for the CEO and other executives that the sale to Shuanghui most certainly does, so it is unlikely to be met with much favor. For that reason alone, the whole of corporate America needs to reassess termination packages so that they no longer create a conflict of interest between executives and shareholders.